Outside factors seen looming large in '09 grain trade

The story of the year in the grain trade for 2008 has, without a doubt, been the influence of outside market factors and the volatility that's paced the corn, wheat and soybean trade.

Now, looking ahead to 2009, traders say that story won't go away. In fact, outside factors like the crude oil market and the direction of the U.S. Dollar may even grow in their influence on the trade.

The USDA-NASS on Thursday released its monthly Crop Production and World Supply and Demand reports. The agency's numbers were largely bearish for the corn and wheat markets, but generally neutral for soybeans.

But, as the market opened and began trading -- presumably doing so on the news of USDA's newly released numbers -- the markets turned in step with the government figures, then snapped right back in line with the big drivers of the day: Outside markets.

"Lots of times when we look at these reports, we look just at the numbers and expect changes in the numbers will have a major impact on the futures markets," says market analyst Helen Pound of Penson GHCO in Chicago. "But, in the last few months, the outside markets have been a very big indicator of where prices will go."

So, what's been the biggest factor? With a slide of more than $100 per barrel in recent months, the crude oil market has gotten the most attention as an outside market factor. But, Pound says the oil market pales in comparison to the fluctuations in the value of the U.S. Dollar as a factor in the grain trade -- especially when compounded by tight domestic and world grain supplies.

"Basically, the value of the Dollar declined and declined and declined to pretty dramatic levels on to about July, then began to rally. As the value of the dollar declined, it really exascerbated a demand situation in the U.S.," Pound says. "When you have a very weak dollar, then that just makes the scramble for those bushels even tighter."

The volatility index is a tool CBOT floor traders use to get a handle on just how wild a ride the markets are on at any given time. Typically, the volatility index is highest in the spring and summer, when there are the most chances for crop-shorting events like drought or flooding. Then, as the combines start to roll, the volatility index slides lower based on the notion that farmers are finally starting to grasp how much grain they'll haul to town.

"It typically runs around 15%, and if it's really high, it might be in the low 20s," Pound says.
"Usually you go from the major uncertain period in the summer -- when the volatility in the ag options is highest -- but once you get into harvest time when you know supplies are there, that volatility goes down."

It's been a different story this year, though. The volatility index has remained high, and has stayed high on a more consistent basis, time-wise. This shows that outside markets, like the U.S. Dollar and other currencies as well as the tight credit situation, are exerting more pressure to the markets than traditional farm production fundamentals.